Why Every Business Should Build Weekly Cash Flow Forecasts

Executive Summary

What are weekly cash flow forecasts?

• Weekly cash forecasts are used to project a company’s liquidity over the medium term, estimating the timing and amounts of cash inflows and outflows.

• Companies big and small, early and mature, should utilize this tool. The weekly cash flow forecast can even be tailored to businesses in all industries and with varying business models.

• Breaking the business down on a weekly basis captures the granular movements that can be overlooked if using a month, quarterly, or yearly interval.

• The optimal forecasting period is 13 weeks, the total weeks in a fiscal quarter. The optimal time period should extend far enough into the future to give your team time to react, but not so far out that the degree of certainty becomes nil.

How are weekly cash flow forecasts useful?

Forces discipline through “cash is king” mentality: While GAAP can help conceal business issues, it is hard to cover problems when focusing on cash.

Enhances understanding of customers and suppliers: The customer and supplier stratification process provides insights into key customers and suppliers, including whether certain customers are slow to pay or if suppliers offer early pay discounts.

Helps businesses understand the cost of growth: Understanding near-term liquidity needs enables a company to plan for growth and raise the appropriate financing.

Reduces cost of capital: By understanding liquidity, a company can minimize borrowing on credit to fund interim payments like payroll and rent.

Increases communication with other departments: In order to complete the cash flow forecast, the finance team must communicate with colleagues across departments.

How to construct a weekly cash flow forecast (Here is a Template you can use):

Step 1: Set up the spreadsheet. Add week-ending dates across the top, and down the left-hand column, create rows for cash receipts and disbursements. Fill in 3-4 weeks of actual data to draw a trend, and then project from there.

Step 2: Understand how the business makes sales and collects cash, choosing between four general business models: contractual, recurring, one-time lump sum, and hybrid.

Step 3: Focus on cash payments, scheduling out fixed payments and what dates they must be made on. Then stratify vendors into critical and non-critical vendors, paying critical vendors first. Lastly, subtract disbursements from cash receipts for net cash flow. If there is a deficit in the week end cash balance, either draw on the credit facility or figure out how to increase receipts or decrease disbursements. Be sure to flag it with key managers.

Why Every Business Should Build Weekly Cash Flow Forecasts

“The fact is that one of the earliest lessons I learned in business was that balance sheets and income statements are fiction, cash flow is reality.” – Chris Chocola

When most finance professionals hear the term “13 week cash forecast,” they view it as a burden—one more task to appease an overbearing lender. Most finance professionals do not get nearly as excited about building it as they do about building a projection model for an acquisition or investment. It doesn’t help that companies generally tend not to focus on their liquidity needs until they are forced to do so. Therefore, people often only prioritize the weekly cash forecasts in distressed situations, when it is too late to take corrective actions. And even still, the analysis is often hastily executed and inaccurate.

Through my time in private equity and consulting, I have witnessed how beneficial the compilation of weekly cash forecasts can be, in industries ranging from distribution and manufacturing, to fitness and services. In almost all cases, the involved companies wished that they had conducted the analysis sooner. Therefore, it’s my strong belief that weekly cash forecasts are crucial for businesses large and small, healthy or distressed, and across all sectors.

What Are Weekly Cash Flow Forecasts?

Weekly cash forecasts are used to project a company’s liquidity over the medium term, estimating the timing and amounts of cash inflows and outflows. The weekly interval forces companies to understand the details of their business at a more granular level. For example, cash inflows could be large one week if a large amount of receivables are collected, but outflows could be huge the next if payroll and rent are due. Breaking the business down on a weekly basis captures the granular movements that can be overlooked if using a month, quarterly, or yearly interval. Why not do a daily forecast, then? In my experience, it can be excessive since it introduces seven times the variables as a weekly forecast, and may not improve the accuracy of the forecast. Therefore, the weekly interval provides a happy medium in achieving granularity without overwhelming detail.

With regards to an optimal forecasting period, the industry standard is 13 weeks, the number of weeks in a fiscal quarter. Ideally, a company should understand how revenues and costs will be incurred in this time frame. If you only project out four to eight weeks, it will be difficult to effectively react to liquidity issues. The optimal time period should extend far enough into the future to give your team time to react, but not so far out that the degree of certainty becomes nil.

Arguments Against Weekly Forecasts Are Short-sighted

I’ve heard, and some of you may have even used, one or more of the following reasons to not do the forecast:

• “That’s great, but these were all distressed situations. My business is healthy, so this is a waste of time.”

• “I have a small team (or no team) and I don’t have time to put together another forecast”

• “My company is growing well, and there is nothing on the horizon to lead me to believe otherwise”

• “My business is different than the ones you described, so cash forecasting doesn’t apply to my company”

• “My shareholders/lenders/parent company believes in us and has deep pockets. Even if we have a problem, they will fund any cash shortfall we might have”

While relatable, these are all short-sighted. Every company, no matter how strong, will inevitably face difficult times. Let’s not forget The Great Recession, when blue chip companies on top of the world (e.g., Goldman Sachs, Morgan Stanley, Lehman Brothers, Bear Stearns, etc.) were brought to their knees. Now, would a weekly cash forecast have prevented the disaster? Perhaps not. But, what I can say with certainty, is that none of these companies had a good handle on their liquidity needs, something which could have mitigated the eventual damage. There are always limits on liquidity and it behooves an operator to know those limits.

Why Are Weekly Cash Flow Forecasts Useful?

Forces discipline through “cash is king” mentality

Operators cannot hide behind accounting tricks to hide underperformance. GAAP can help conceal business issues, but it is hard to cover problems when focusing on cash. Focusing on the near and medium term time frames can uncover potential issues quickly and can help businesses subject to seasonality get through off-seasons.

Enhances understanding of customers and suppliers

The customer and supplier stratification process provides insights into key customers and suppliers, depending on the situation:

• If a customer is paying slowly: It can be used as an excuse to call a customer. Instead of simply demanding payment, it can be another revenue generating opportunity—assuming your company still wants business from this customer

• If certain suppliers offer early pay discounts: Having a handle on cash flow can enable a company to take advantage of these discounts and increase profitability

• If certain vendors are relaxed on the enforcement of their terms: A company can stretch some of their flexible suppliers to decrease net working capital and increase cash

Helps businesses understand the cost of growth

Growing companies are often cash-constrained because capital expenditures and inventory investments must be made ahead of the revenue associated with the growth. Understanding near-term liquidity needs enables a company to plan for this growth and raise the appropriate financing. It thus also helps a company avoid failure to deliver or worse, major financial distress.

Reduces cost of capital

By understanding liquidity, a company can minimize borrowing on credit to fund interim payments like payroll and rent. In other cases, a company can reduce the amount of cash kept on hand and instead deploy the capital through re-investment into the business, debt reduction or dividends.

Increases communication with other departments

In order to properly complete the cash flow forecast, the finance team must communicate with colleagues in sales, purchasing, accounts payable, accounts receivable, human resources, etc. It forces the finance forecasting experts to gain a fuller understanding of the business and how it operates.

When and for What Types of Businesses Is It Appropriate?

In many cases, financial stress can be avoided by understanding incoming and outgoing cash flow, and taking appropriate corresponding action. In all cases, a business can benefit from cash forecasting. Remember, CASH IS KING! It’s my strong belief that companies big and small, early and mature, should utilize this tool. The weekly cash flow forecast can even be tailored to every type of business.

Invaluable for companies in dire situations

When I saw my first weekly cash forecast in the fall of 2008, I admit that I was skeptical of its value. At the time, I was working for a distribution business that served companies in the transportation and construction industries. However, with the forecast, we were able to glean insights into when people were coming into our stores, and when cash was actually hitting our bank account. Despite the tough economic environment, basic “blocking and tackling” business performance improved as did cash flow. We realized that sales spiked on certain days of the month (the 1st, 10th, 20th) due to certain buying patterns. The company capitalized on this trend by running promotions those days to increase the average dollars per order. I quickly became a believer.

In another situation with a services business, we averted disaster because the weekly cash forecast accurately projected that we would run out of cash in the following month if the bank forced a mandatory repayment. The business did over $100 million a year in sales, but we were going to have a $1 million hole due to the major seasonality of the company. We used the forecast to convince the bank to reduce the amount of debt repayment they were requiring and let us get through the seasonal cash crunch to more profitable times. In addition to helping us avoid a crisis, the accurate insights into the business built our credibility with the bank when we presented a re-forecast to renegotiate our covenant package.

The exercise is also useful for healthy companies

Though counter intuitive, when business is great, it could make sense to get in the habit of weekly forecasting. Continue testing and honing the forecast so that when an issue eventually presents itself, the company can take the appropriate action to cut costs, hoard cash, and survive the rough patch.

For example, a company I worked with was performing well and had ample liquidity, but prudently still chose to pursue the exercise. It ended up being the right decision. Many suppliers in the industry offered early pay discounts, which the company had not leveraged in the past because it prioritized working capital. However, after running some sensitivities, we concluded that the uptick in profitability would be more valuable than the near-term drain from paying some costs sooner. In this scenario, the weekly cash forecast helped us achieve increased profitability, stronger relationships with suppliers, and higher operational efficiency.

How to Construct a Weekly Cash Flow Forecast

Weekly cash forecasts are not nearly as difficult as they are often made out to be. (Use this Template as starting point.) Here are a couple items to keep in mind:

The model includes two major components. One side of the equation is cash receipts (revenue), and the other is cash disbursements (cash payments). We’ll address both.

Garbage in, garbage out. Your analysis is only as good as the numbers and data you are inputting. Do your best to obtain accurate information before inputting into your model.

Use “shoe box accounting.” The most difficult part for finance professionals is changing their mentality from a GAAP accrual method to cash accounting. Think of your business as a shoe box, and the only concern is the cash that goes in and goes out—hence “shoe box accounting.” Forget GAAP items like revenue and COGS recognition,GAAP rent expense, bonus accruals, PIK interest and goodwill impairment—they mean nothing in this analysis. Sometimes the GAAP complexities and attributions shroud the true financial state of a company. Instead, focus on cold, hard cash: cash receipts, payments for inventory or services, cash interest payments, cash rent, mandatory debt principal repayments, etc.

This is particularly important if your business has a large deferred revenue component and collects cash payments in advance of recognizing revenue. In a school I was involved with in the past, tuition was paid in advance of the school year. Therefore, July had a major influx of cash, but no revenue. The subsequent months recognized revenue, but no cash came in.

Click here for access to the 13 Week Cash Forecast Tool

Parting Thoughts

In closing, weekly cash forecasting can significantly improve discipline and operational control. While it will not solve all problems for a fundamentally challenged business, it can improve business processes and functionality. Weekly forecasting leads to insights into the company as to where the business can save money, potentially increase revenues and increase cash flow. Even more importantly, if done properly with critical thinking and proper insight, it can help managers get ahead of any potential problems and plan appropriately. After all, Richard Branson puts it best: “Never take your eyes off the cash flow because it’s the lifeblood of business.”

Marty Mooney

Principal with Muirlands Capital

513-378-2147

martymooney@gmail.com

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Tools

  • 13 Week Cash Forecast Tool

    This 13 Week Cash Forecast Tool is the first step to getting your cash flow under control. It offers an easy format to develop a cash forecasting methodology that will work for your business. It will challenge professionally trained accountants - it ignores, in fact, it despises, accrual accounting.


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